Most entrepreneurs show up to pitch meetings with potential investors armed with grand plans. Most entrepreneurs overstate the amount of funding they are asking for and the amount of money they expect to earn in their venture. For whatever reason they do this, be it optimism or fear, it is not the most persuasive way to approach an angel. I had an entrepreneurship teacher, John Helferich, with a much better idea for raising your venture capital.
Venture capitalists want to invest in businesses they feel confident will make money. They want to get their investment back, plus a healthy return. One of the best ways to get investors on board with your idea is to have an idea that already makes money. Have paying customers. Be at capacity. Need to expand. That ability to show evidence of progress, of a money making idea and of an ability to meet targets is attractive to investors.
For this reason, in lieu of a line of customers you can’t serve, you should ask for funding in phases. Do not ask for a lump sum to start a business. Ask for your funding in pieces.
How this works: first, have a business plan and all similar documents you would otherwise prepare before going to shop for capital. Next, think about how much money you want to make. That’s right. Put a number on it. This is an empowering exercise. When in doubt, choose $100 million dollars of net income as your goal.
Next, think of all the dealbreaker questions you need to answer before you can make $100 million dollars. A dealbreaker question is one in which, if the answer is no, it kills your business plan. Once you generate your list, prioritize them. Which ones are the highest risk- that have to be answered first- before moving on to the other questions?
Once you have decided on your dealbreaker questions, walk into the pitch meeting like you otherwise would. Tell your story. Make them fall in love with your value proposition. Once you have them to the point at which you ask for money, ask for the specific, accurate and reasonable amount of money that it would require to find the answers to your top five dealbreaker questions. Set deadlines for you to meet and arrange meetings for that time.
Once they cut you a check, do the work, answer the questions and further develop your ideas. Write a new business plan that has been altered to include the new information you have gained. Meet with your investors again, present them with your results, the next set of questions and the correlating funding request.
This type of piece by piece or “baby steps” funding strategy is an easier sell than the large up front request. You may have to explain what your plan is – only smart entrepreneurs present this way -- but investors will appreciate it because it minimizes your their risk by requiring less of their resources. This strategy will also help you better develop a better business; baby step funding doesn’t punish mistakes with failure and or bankruptcy the way actually going under does. Your mistakes might be rewarded with another round of funding if you can prove you learned from them.
Try the baby steps fundraising method before the big-ask method; it’s likely to get you the business you want and the investors who trust you.